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Although the final transferability regulations have yet to be announced, the federal government recently published proposed regulations that provide a glimpse into how the government will likely respond to some comments made in the context of the tax credit transferability.
Based on the proposal, it seems that the final tax credit transferability regulations are not likely to provide a simple mechanism for a partnership to allow tax exempt partners to take advantage of direct pay. However, if one follows the new proposed regulations, there may be a path for those eligible for direct pay (e.g. governments, tax exempt entities, etc.) to co-invest with other investors in energy projects and allow each investor to utilize direct pay or transferability, depending on their eligibility.
The Inflation Reduction Act created two regimes for owners of eligible for tax credits.
This allows the credit holder to get a direct payment from the government for the amount of the credit.
Credits eligible for Direct Pay for all owners:
For other credits (e.g. solar or wind ITC or PTC) only certain investors, such as governments and exempt entities, are eligible for direct pay.
This allows the credit holder to sell their credit to an unrelated third party. Transferability is available to owners of ITCs and PTCs that are not eligible for Direct Pay.
The proposed transferability regulations indicated that partnerships that had partners eligible Direct Pay could not utilize Direct Pay nor could the partnership allocate the rights to the credits to its partners.
The new proposed regulations provide a mechanism by which co-owners of an energy project can elect out of the partnership tax rules and each treat themselves as having a direct interest in the energy project, even if the co-owners own the assets through the entity.
The release of this process implies that there is not likely to be a simpler process that will allow tax-exempt partners, and other partners eligible for Direct Pay, to be able to easily take advantage of Direct Pay.
However, these partnerships will still be eligible to take advantage of Transferability. It is important to note for partnerships with partners that are eligible for Direct Pay should analyze the impact that partners have on the amount of the tax credit that the partnership has available to use and that can be transferred.
Interested in learning more about transferring your qualified advanced energy project credits?
Connect with the team at Atheva.
